Reading All the News at the Same Time: Predicting Mid-term Stock Price Developments Based on News Momentum

Abstract

This paper investigates whether news momentum can predict medium-term stock index developments. News momentum can be built by aggregating tone of news over the past weeks. We find that news momentum can predict future stock price developments and establish profitable trading strategies that beat buy-and-hold and momentum benchmarks. Trades are issued for significant changes in momentum between current and prior weeks. We ensure stability of our results by using two different news data sets and by analyzing both different investment horizons and aggregation times for our news momentum. Compared to intraday news trading, medium-term momentum trading allows higher investment volumes and can contribute to complex investment decisions also incorporating other qualitative and quantitative factors.